Birmingham Bloomfield Bancshares (BBBI) 10-K 2009 FY Annual report

EXHIBIT 13

April 2010

Dear Fellow Shareholders:

As you know, Bank of Birmingham is very much a community bank. The term “community bank” has been around a longtime; only recently has its value as a brand become apparent. As the name suggests, we are locally owned and locally operated. Decisions are made by individuals who live in and understand the market. There is a positive perception of a community bank versus a big bank. That is why I believe we are very well positioned to continue to be successful.

In 2009, we increased loans and deposits, improved our margins, eliminated overhead, and maintained credit quality. Despite the poor economy, we continued to grow at double digit rates. Our assets grew by $25.3 million (38%) from 2008 to 2009. Asset growth was funded by an increase in deposits from $57.7 million in 2008 to $81.5 million in 2009. We were also able to increase our net interest margin from 3.31% in 2008, to 3.51% in 2009. What is even more encouraging is we were able to increase our margin from 3.28% in January 2009 to 3.64% in December of 2009. We expect continued margin improvement in 2010.

Credit quality remains one of the keys to our success. We are very fortunate we have not had the problems in our loan portfolio that a majority of other banks have had. Our net charge offs of $16,000 for 2009 is something we are very proud of. I attribute this success to the quality and experience of our Relationship Managers and credit staff. Although I am encouraged by improvement in some sectors of the economy, I believe the recovery is still in a very fragile state. As a result, credit quality will continue to be a challenge for all banks in 2010.

Capital is a critical component for any business, including a bank. Those companies that are well capitalized have the staying power necessary to work through difficult times. Capital availability or the lack thereof, is the biggest challenge facing our industry. Traditional sources of capital have not yet reentered the market. We feel very fortunate that we are one of the few banks in Michigan approved by the Treasury to receive TARP funds. As a result, our year-end capital ratios put us in the “well capitalized” category as defined under regulatory guidelines.

Unfortunately, we reported a net loss of $1.9 million for 2009 compared to a net loss of $1.5 million for 2008. Our 2009 loss includes an extraordinary charge of $609,330 resulting from the closing of our Bloomfield branch and an increase in our loan loss reserve in December. The elimination of the branch will reduce our occupancy expense by $250,000 per year, bringing this expense more in line with our peers. And though our loan loss experience did not dictate an increase in our reserve, we thought it prudent to do so, given the continued softness both in the residential housing and commercial real estate markets.

I am encouraged by what I see ahead. The U.S. auto companies have lowered costs, improved quality, and are designing attractive vehicles customers want. Our regional politicians seem to be working hard to move Southeast Michigan forward. Companies and individuals have gone through the difficult process of deleveraging. I believe the worst is behind us.

My goal for 2010 is to continue to prudently grow the bank, generate consistent profitability, and remain committed to providing outstanding customer service. I appreciate your continued support in helping make that happen. Please feel free to call me (248)283-6430 or email me rob.farr@bkofb.com at anytime with your questions or comments.

Sincerely,
Robert E. Farr
President and CEO

Plante & Moran, PLLC
Suite 500
2601 Cambridge Court
Auburn Hills, MI 48326
Tel: 248.375.7100
Fax: 248.375.7101
plantemoran.com

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Birmingham Bloomfield Bancshares Inc.

We have audited the accompanying consolidated balance sheet of Birmingham Bloomfield Bancshares, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Birmingham Bloomfield Bancshares, Inc. at December 31, 2009 and 2008 and the consolidated results of its operations, changes in stockholders’ equity and its cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC

Auburn Hills, Michigan
March 31, 2010

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED BALANCE SHEETS

	December 31,
	2009			2008
Assets
Cash and cash equivalents
Cash	$	4,644,416		$	1,201,318
Federal funds sold		3,113,785			3,462,179
Total cash and cash equivalents		7,758,201			4,663,497
Securities, available for sale (Note 3)		3,835,082			3,880,401
Loans (Note 4)
Total loans		79,655,896			56,840,675
Less: allowance for loan losses		(1,173,865	)		(710,000	)
Net loans		78,482,031			56,130,675
Premises & equipment (Note 6)		1,488,689			2,232,317
Interest receivable and other assets		1,072,770			391,646
Total assets	$	92,636,773		$	67,298,536
Liabilities and Shareholders’ Equity
Deposits (Note 5)
Non-interest bearing	$	8,494,903		$	5,194,795
Interest bearing		72,970,583			52,553,240
Total deposits		81,465,486			57,748,035
Interest payable and other liabilities		443,354			238,532
Total liabilities		81,908,840			57,986,567
Shareholders’ equity
Senior cumulative perpetual preferred stock series A $1,000 liquidation value per share, 5%
Authorized, issued and outstanding - 1,635 shares		1,635,000			-
Discount on senior preferred stock series A		(79,427	)		—
Senior cumulative perpetual preferred stock series B $1,000 liquidation value per share, 9%
Authorized, issued and outstanding - 82 shares		82,000			—
Premium on preferred stock series B		8,634			—
Senior cumulative perpetual preferred stock series C $1,000 liquidation value per share, 5%
Authorized, issued and outstanding - 1,744 shares		1,744,000			—
Common stock, no par value
Authorized - 4,500,000 shares
Issued and outstanding - 1,800,000 shares		17,034,330			17,034,330
Additional paid in capital-share based payments		489,459			466,553
Accumulated deficit		(10,299,436	)		(8,311,252	)
Accumulated other comprehensive income		113,373			122,338
Total shareholders’ equity		10,727,933			9,311,969
Total liabilities and shareholders’ equity	$	92,636,773		$	67,298,536

See notes to consolidated financial statements

1

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENT OF OPERATIONS

	For the Years Ended December 31,
	2009			2008
Interest Income
Loans, including fees	$	3,876,233		$	3,052,072
Taxable securities		151,777			138,339
Federal funds sold		4,103			116,000
Correspondent bank		26,853			2,258
Total interest income		4,058,966			3,308,669
Interest expense
Deposits		1,345,475			1,386,846
Total interest expense		1,345,475			1,386,846
Net interest income		2,713,491			1,921,823
Provision for loan losses		480,380			384,003
Net interest income after provision for loan losses		2,233,111			1,537,820
Non-interest income
Loan fees and charges		13,118			18,152
Deposit fees and charges		70,178			69,009
Other income		15,062			30,266
Total non-interest income		98,358			117,427
Non-interest expense
Salaries and benefits		1,601,016			1,422,774
Occupancy & equipment expense		808,973			820,491
Loss on Bloomfield Branch closure		609,330			—
Data processing expense		211,514			185,211
Advertising and public relations		61,740			74,431
Professional fees		340,397			278,087
Printing and office supplies		27,950			25,066
Other expense		583,471			361,289
Total non-interest expense		4,244,391			3,167,349
Income taxes		—			—
Net loss	$	(1,912,922	)	$	(1,512,102	)
Dividend on senior preferred stock		(64,055	)		—
Accretion of discount on pref stock		(11,207	)		—
Effective dividend on preferred stock		(75,262	)		—
Net loss applicable to common shareholders	$	(1,988,184	)	$	(1,512,102	)
Basic loss per share		(1.10	)		(0.84	)
Diluted loss per share		(1.10	)		(0.84	)

See notes to consolidated financial statements

2

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

											Accumulated
						Additional					Other
	Preferred			Common		Paid in		Accumulated			Comprehensive
	Stock			Stock		Capital		Deficit			Income			Total
Balance at December 31, 2007	��	—			17,034,330		462,000	$	(6,799,150	)		62,459			10,759,639
Share based payments expense		—			—		4,553		—			—			4,553
Comprehensive loss:
Net loss		—			—		—		(1,512,102	)		—			(1,512,102	)
Change in unrealized gain on securities — Net of reclassification adjustment of $19,270 (Note 3)		—			—		—		—			59,879			59,879
Total comprehensive loss															(1,447,670	)
Balance at December 31, 2008		—			17,034,330		466,553	$	(8,311,252	)		122,338		$	9,311,969
Issue senior preferred stock A		1,635,000			—		—		—			—			1,635,000
Discount senior preferred stock A		(92,000	)		—		—		—			—			(92,000	)
Accretion of senior pref stock A		12,573			—		—		(12,573	)		—			0
Issue preferred stock B		82,000			—		—		—			—			82,000
Premium preferred stock B		10,000			—		—		—			—			10,000
Amortization of premium pref stock B		(1,366	)		—		—		1,366			—			0
Issue senior preferred stock C		1,744,000			—		—					—			1,744,000
Preferred dividends		—			—		—		(64,055	)		—			(64,055	)
Share based payments expense		—			—		22,906		—			—			22,906
Comprehensive loss:
Net loss		—			—		—		(1,912,922	)		—			(1,912,922	)
Change in unrealized gain on securities — Net of reclassification adjustment of $3,028 (Note 3)		—			—		—		—			(8,965	)		(8,965	)
Total comprehensive loss															(1,921,887	)
Balance at December 31, 2009	$	3,390,207		$	17,034,330	$	489,459	$	(10,299,436	)	$	113,373		$	10,727,933

See notes to consolidated financial statements

3

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended December 31,
	2009			2008
Cash flows from operating activities
Net loss	$	(1,912,922	)	$	(1,512,102	)
Share based payments expense		22,906			4,553
Provision for loan losses		480,380			384,003
Accretion of securities		(5,147	)		(30,604	)
Gain on calls of securities		(3,028	)		(19,270	)
Depreciation expense		786,190			312,660
Net decrease (increase) in other assets		(699,474	)		66,511
Net increase in other liabilities		204,822			629
Net cash used in operating activities		(1,126,273	)		(793,620	)
Cash flows from investing activities
Origination of loans, net of principal repayments		(22,813,386	)		(19,967,702	)
Purchase of securities		(2,954,862	)		(3,990,436	)
Proceeds from sales, calls or maturities of securities		2,999,391			2,815,718
Purchases of premises and equipment		(42,562	)		(25,276	)
Net cash used in investing activities		(22,811,419	)		(21,167,696	)
Cash flows from financing activities
Increase in deposits		23,717,451			21,485,687
Proceeds from sale of senior preferred stock		3,379,000			—
Dividend on senior preferred stock		(64,055	)		—
Net cash provided by financing activities		27,032,396			21,485,687
(Decrease) increase in cash and cash equivalents		3,094,704			(475,629	)
Cash and cash equivalents at the beginning of the period		4,663,497			5,139,126
Cash and cash equivalents at the end of the period	$	7,758,201		$	4,663,497

See notes to consolidated financial statements

4

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant accounting principles

Basis of Presentation- The accompanying consolidated statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of Birmingham Bloomfield Bancshares, Inc. (the “Corporation”), and its wholly owned subsidiary, Bank of Birmingham (“Bank”). All significant intercompany transactions are eliminated in consolidation.

Organization- The Corporation was incorporated February 26, 2004 as Birmingham Bloomfield Bancorp, Inc., for the purpose of becoming a bank holding company under the Bank Holding Company Act of 1956, as amended. The Corporation subsequently changed its name to Birmingham Bloomfield Bancshares, Inc. The Corporation received the required regulatory approvals to purchase the common stock of the Bank on July 26, 2006. The Corporation closed on its first phase of its equity offering totaling $13,988,300 on July 26, 2006 and capitalized the Bank with $13,000,000. Bank of Birmingham opened for business on July 26, 2006. The Corporation continued raising capital until the closing of its offering on September 30, 2006. Early in the fourth quarter of 2006, the Corporation closed on the remaining portion of its equity offering of $4,011,700 bringing its total equity to $18,000,000 before offering costs. Direct costs related to the offering of common stock were $966,000 and were capitalized and netted against the offering proceeds as of December 31, 2006.

Use of Estimates- The accounting and reporting policies of the Corporation and its subsidiary conform to accounting principles generally accepted in the United States of America. Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, investment securities and the valuation of deferred tax assets.

Nature of Operations- The Corporation provides a variety of financial services to individuals and small businesses through its main office in Birmingham, Michigan and branch office in Bloomfield Township, Michigan. The Bloomfield Township location was closed in January 2010 due to the lack of profitability. Its primary deposit products are savings, demand deposit accounts and term certificate accounts and its primary lending products are commercial loans, commercial real estate loans, home equity lines and consumer loans. The Bank serves businesses and consumers across Oakland and Macomb counties with the largest geographic segment of our customer base being in Oakland County.

Cash and Cash Equivalents- For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold which mature within 90 days.

Loans- The Corporation grants mortgage, commercial, and consumer loans to customers throughout the state focusing on southeast Michigan. A large portion of the loan portfolio is represented by commercial real estate mortgages and equity line loans primarily in Oakland County, Michigan. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

5

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies – continued

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses- The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the ability to collect a loan balance is impaired. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the loans in light of historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, except if modified and considered to be a troubled debt restructuring. The Corporation performed no such modifications in the current year.

Off-balance-sheet Instruments- In the ordinary course of business, the Corporation has entered into commitments under commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

6

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies – continued

Property and Equipment– The Corporation has approximately $1,489,000 of property and equipment on its balance sheet as of December 31, 2009. The majority of this represents leasehold improvements on the Corporation’s main office at 33583 Woodward, Birmingham, MI. Leasehold improvements and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the shorter of the estimated useful lives of the assets or the length of the building leases as applicable.

Income Taxes –Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and the tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Other Comprehensive Income- Basic accounting principals generally require that recognized revenue, expenses, gains, and losses be included in net income (loss). Certain changes in assets and liabilities, however, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet. Such items, along with net income (loss) are components of comprehensive income.

Earnings per Share- Basic earnings per share represents income available to shareholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share includes stock options and organizer warrants.

Reclassification- Certain amounts appearing in the prior year’s financial statements have been reclassified to conform to the current year’s financial statements.

Note 2 – Fair Value Accounting

Valuation Hierarchy

FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and are the primary method of valuation used by Birmingham Bloomfield Bancshares, Inc. The three levels are defined as follows.

•	Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets which the Corporation can participate.
	Birmingham Bloomfield Bancshares currently holds no securities in level one of the hierarchy.
•	Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	Level 2 assets and liabilities for Birmingham Bloomfield Bancshares, Inc. include available for sale investments in government sponsored agencies, asset backed securities, and investments in obligations of state and political subdivisions. Fair values of these items are determined via external pricing from vendors.

7

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Fair Value Accounting – continued

•	Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement, and include inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
	Level 3 assets and liabilities for Birmingham Bloomfield Bancshares, Inc. include FHLB stock.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents the financial instruments carried at fair value as of December 31, 2009, on the Consolidated Balance Sheet and by FASB ASC 820 valuation hierarchy (as described above):

Assets measured at fair value on a recurring basis as of December 31, 2009 (000’s omitted):

	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Balance at
	Assets		Inputs		Inputs		December
	Level 1		Level 2		Level 3		31, 2009
Securities available for sale	$	—	$	3,673	$	0	$	3,673

Note 3 – Securities

The amortized cost and fair value of securities, with gross unrealized gains and losses, follows at December 31, 2009 and 2008 (000s omitted):

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
2009
U. S. Government agency securities	$	2,342	$	18	$	—	$	2,360
Municipal securities		200		4		—		204
Mortgage backed securities		1,018		91		—		1,109
Corporate bonds		—		—		—		—
Sub-Total Available for Sale	$	3,560	$	113	$	—	$	3,673
FHLB Stock		162		—		—		162
Total Securities	$	3,722	$	113	$	—	$	3,835
2008
U. S. Government agency securities	$	2,004	$	30	$	—	$	2,034
Municipal securities		—		—		—		—
Mortgage backed securities		1,250		92		—		1,342
Corporate bonds		504		—		—		504
Total Securities	$	3,758	$	122	$	—	$	3,880

8

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Securities - continued

As of December 31, 2009 and December 31, 2008, all securities are available for sale. The securities held in our portfolio experienced no rating changes during the year and remain at “AAA” for all except the municipal holding which is at “AA” based on ratings by Standard & Poor’s, none of which were determined to be impaired. At December 31, 2009 there were $1.45 million in securities pledged to secure public deposits from the State of Michigan. There were no securities pledged at December 31, 2008. Other securities not listed above include Federal Home Loan Bank stock which is restricted in that it can only be sold back to the Federal Home Loan Bank. The carrying value of the stock approximates its fair value.

The amortized cost and estimated fair value of all securities at December 31, 2009, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties. The contractual maturities of securities are as follows (000s omitted):

			Estimated
	Amortized		Fair
	Cost		Value
Due in one year or less	$	—	$	—
Due in one year through five years		2,542		2,564
Due in five years through ten years		162		162
Due after ten years		—		—
Subtotal		2,704		2,726
Mortgage backed securities		1,018		1,109
Total	$	3,722	$	3,835

For the year ended December 31, 2009, proceeds from sales of securities available for sale amounted to $2,755,000. Gross realized gains amounted to $3,028 and gross realized losses amounted to $0. For the year ended December 31, 2008, proceeds from sales of securities available for sale amounted to $2,635,000. Gross realized gains amounted to $19,270 and gross realized losses amounted to $0. The Corporation had no impaired securities or individual securities with gross unrealized losses at December 31, 2009 or 2008.

9

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Note 4 – Loans

A summary of the balances of loans as of December 31, 2009 and 2008 is as follows (000s omitted):

	2009		2008
Mortgage loans on real estate:
Residential 1 to 4 family	$	1,353	$	2,745
Multifamily		12,641		7,676
Commercial		35,861		23,064
Construction		518		3,000
Second mortgage		171		736
Equity lines of credit		11,445		10,381
Total mortgage loans on real estate		61,989		47,602
Commercial loans		17,160		8,232
Consumer installment loans		507		1,007
Total loans		79,656		56,841
Less:
Allowance for loan losses		1,174		710
Net loans	$	78,482	$	56,131

An analysis of the allowance for loan losses follows (000s omitted):

	2009			2008
Balance at beginning of year	$	710		$	560
Provision for loan losses		480			384
Loans charged off		(18	)		(318	)
Recoveries of loans previously charged off		2			84
Balance at end of year	$	1,174		$	710

At December 31, 2009, there were two loans classified as sub-standard for which the Bank set aside a specific reserve. The loans continue to pay and are not on non-accrual status.

Certain directors and executive officers of the Bank, including associates of such persons, were loan customers of the Company during 2009 and 2008. A summary of aggregate related-party loan activity for loans to any related party at December 31, 2009 and 2008 is as follows (000s omitted):

	2009			2008
Balance at January 1	$	1,473		$	1,038
Loans no longer related-party		—			(72	)
New loans		1,165			950
Repayments		(711	)		(443	)
Balance at December 31	$	1,927		$	1,473

10

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Bank Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment as of December 31 follows (000s omitted):

	2009		2008
Leasehold improvements	$	2,131	$	2,126
Furniture and equipment		462		454
Computer equipment & software		424		394
Total		3,017		2,974
Less: accumulated depreciation		1,528		742
Net premises and equipment	$	1,489	$	2,232

Depreciation expense for the years ended December 31, 2009 and 2008 amounted to $786,190 and $312,660 respectively.

During 2009 a review of branch profitability was performed. The Bloomfield Township branch location had not been profitable for the three years it was in operation. During the fourth quarter of 2009, a decision was made to close the branch and the process of notification and closure began. The Bloomfield Township branch closed at the end of business on January 18, 2010. The leasehold improvements, furniture and equipment and computer equipment impairment charges related to the closure amounted to $482,830. In addition, a charge to terminate the lease by agreement with the leaseholder for a one time payment of $110,000 and other miscellaneous closure costs of $16,500 were accrued, for a total cost of $609,330 for the Bloomfield branch location closure.

Note 6 – Deposits

The following is a summary of the distribution of deposits at December 31 (000s omitted):

	2009		2008
Non-interest bearing deposits	$	8,495	$	5,195
NOW accounts		7,894		7,882
Savings and money market accounts		19,600		10,571
Certificates of deposit <$100,000		13,240		13,089
Certificates of deposit >$100,000		32,236		21,011
Total	$	81,465	$	57,748

At December 31, 2009, the scheduled maturities of time deposits are as follows (000s omitted):

	<$100,000		>$100,000		Total
2010	$	8,613	$	12,840	$	21,453
2011		3,543		16,997		20,540
2012		767		2,266		3,033
2013		—		133		133
2014		317		—		317
Total	$	13,240	$	32,236	$	45,476

11

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Stock Option Plan

The Corporation measures the cost of employee services received in exchange for equity awards, including stock options, based on the grant date fair value of the awards. The cost is recognized as compensation expense over the vesting period of the awards. The Corporation is required to estimate the fair value of all stock options on each grant date, using an appropriate valuation approach such as the Black-Scholes option pricing model.

The Corporation’s 2006 Stock Incentive Plan (the “Plan”) was approved by shareholders on April 23, 2007. Under the Plan, the Corporation is authorized to grant options to key employees for up to 225,000 shares of common stock. The Corporation believes the Plan serves to better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Corporation’s stock at the date of grant. The option awards vest based upon a three year to five year schedule, with the first tranche vesting as of April 23, 2008, and have 10-year contractual terms.

During 2007, the Corporation issued 180,000 stock options. Based on the fair market value at the grant date using the Black-Scholes option pricing model, the compensation cost recognized by the Corporation for the portion of the equity awards earned during 2009 and 2008 was $22,906, $4,553 respectively. No income tax benefit was recognized in the income statement for share based compensation (see Note 8). There is no difference between basic and diluted loss per share due to the anti-dilutive effect of outstanding options at December 31, 2009. No additional options were granted during 2009 or 2008.

The Corporation estimates the value of its stock options using the calculated value on the grant date. The Corporation measures compensation cost of employee stock options based on the calculated value instead of fair value because it is not practical to estimate the volatility of its share price. The Corporation does not maintain an internal market for its shares and its             shares are rarely traded privately. While it was a de novo institution, the Corporation’s initial stock offering was completed in July 2006. The calculated value method requires that the volatility assumption used in an option-pricing model be based on the historical volatility of an appropriate industry sector index.

The Corporation uses a Black-Scholes formula to estimate the calculated value of its share-based payments. The volatility assumption used in the Black-Scholes formula is based on the volatility of the America’s Community Bankers index as quoted on the NASDAQ exchange. The Corporation calculated the historical volatility using the closing total returns for that index for the 3 years immediately prior to the grant date.

The weighted average assumptions used in the Black-Scholes model are noted in the following table. The Corporation uses expected data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Calculated volatility	12.40	%
Weighted average dividends	0.00	%
Expected term (in years)	5
Risk-free rate	4.50	%

12

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Stock Option Plan - continued

The aggregate intrinsic value of the options represents the total pretax intrinsic value (i.e., the difference between the Corporation’s closing stock price on the last trading day of our fiscal year ended 2009 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. As of December 31, 2009, all outstanding and exercisable options are out of the money (options have an exercise price that exceeds market value), and they are assumed to have no intrinsic value. The intrinsic value of the options changes based on the fair market value of the Corporation’s stock. As of December 31, 2009 and 2008, outstanding options were 82,500 and 90,000 respectively. Options available to be exercised at a price of $10 were 46,666 at the end of 2009 versus 23,333 at year end 2008. There were no options exercised for the three years ended December 31, 2009.

Note 8 – Income Taxes

The Corporation has net operating loss carry-forwards of approximately $7,055,000 generated from inception through December 31, 2009 that are available to reduce future taxable income through the year ending December 31, 2029. The deferred tax asset generated by that loss carry-forward has been offset with a valuation allowance since the Corporation does not have a history of earnings.

The components of the net deferred tax assets, included in other assets, are as follows:

	2009		2008
Deferred tax assets:
Allowance for loan losses	$	285,014	$	142,662
Organizational costs		542,828		590,375
Net operating loss carry-forward		2,398,855		2,049,105
Share based compensation		166,416		158,628
Other		77,716		48,626
Total deferred tax assets		3,470,829		2,989,396
Less valuation allowance		3,449,615		2,808,334
Deferred tax liabilities:
Fixed assets		—		134,261
Other		85,274		46,801
Total deferred tax liabilities		85,274		181,062
Net deferred tax assets	$	—	$	—

13

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 – Income Taxes - continued

Allocation of income taxes between current and deferred portions is as follows:

	2009		2008
Current expense	$	—	$	—
Deferred (benefit) expense		—		—
Total income tax expense	$	—	$	—

The reasons for the differences between the income tax expense at the federal statutory income tax rate and the recorded income tax expense are summarized as follows:

	2009			2008
Income tax benefit at federal statutory rate of 34 percent	$	(650,393	)	$	(514,115	)
Increases resulting from nondeductible expenses		9,112			6,992
Other		—			—
Change in valuation allowance		641,281			507,123
Income tax expense	$	—		$	—

Note 9 – Leases and Commitments

The Corporation has entered into a lease agreement for its main office. Payments began in February 2005 and the initial term of the lease expires in October 2015. In October 2007, the Corporation exercised its first renewal option on the property which expires in October 2025. The main office lease has one additional ten year renewal option. The Corporation also entered into a lease agreement for its branch office in Bloomfield Township which provided for lease payments to begin in March 2006 and expire February 2016. The Bloomfield Township branch office lease was terminated effective January 18, 2010 pursuant to an agreement with the leaseholder. The termination agreement called for a one time payment of $110,000 to the leaseholder to end the lease. Rent expense under these agreements was $221,000 for the main office and $59,000 for the branch office for the year ended December 31, 2009, and $217,000 for the main office and $57,000 for the branch office for the year ended December 31, 2008. In January 2010, a six month lease agreement was signed for office space to house a business development officer. Rent expense under the agreement added $5,400 to 2010 in the chart below.

The following is a schedule of future minimum rental payments under operating leases on a calendar year basis:

2010	$	235,676
2011		229,840
2012		234,416
2013		239,098
2014		243,910
thereafter		2,975,548
Total	$	4,153,088

14

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – Restrictions on dividends, loans and advances

Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Corporation.

Prior approval of the Bank’s federal regulator is required if the total dividends declared by the Bank in a calendar year exceed the sum of the net profits of the Bank for the preceding three years, less any required transfers to surplus. In addition, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum standards. Because of the Bank’s startup losses, at December 31, 2009, the Bank’s retained earnings available for the payment of dividends, without approval from the regulators, was $0. Accordingly, all of the Corporation’s investment in the Bank was restricted at December 31, 2009.

Loans or advances made by the Bank to the Corporation are generally limited to 10 percent of the Bank’s capital stock and surplus. Accordingly, at December 31, 2009, Bank funds available for loans or advances to the Corporation amounted to $0.9 million.

Note 11 – Fair Value of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value disclosure herein excludes all non-financial instruments. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents- The carrying values of cash and cash equivalents approximate fair values.

Securities- Fair values of securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Receivable- For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities- The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

15

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 – Fair Value of Financial Instruments - continued

Accrued Interest- The carrying value of accrued interest approximates fair value.

Other Financial Instruments- The fair value of other financial instruments, including loan commitments and unfunded letters of credit, based on discounted cash flow analyses, is not material.

The carrying values and estimated fair values of financial instruments are as follows (in thousands):

	2009				2008
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	7,758	$	7,758	$	4,663	$	4,663
Securities available for sale		3,835		3,835		3,880		3,880
Loans		78,482		78,952		56,131		56,563
Accrued interest receivable		335		335		293		293
Financial liabilities:
Deposits		81,465		81,807		57,748		57,897
Accrued interest payable		77		77		153		153

Note 12 – Retirement Plans

The Corporation sponsors a 401(k) plan for substantially all employees. There were no required matching contributions for 2008 or 2009.

Note 13 – Parent Only Financial Statements

The condensed financial information that follows presents the financial condition of Birmingham Bloomfield Bancshares, Inc. (the “Parent”) along with the results of operations and its cash flows. The Parent has recorded its investment in its subsidiaries at cost plus its share of the earnings (losses) of its subsidiaries since inception. The Parent recognizes dividends from its subsidiaries as revenue and earnings of its subsidiaries as other income. The Parent financial information should be read in conjunction with the Corporation’s consolidated financial statements.

16

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 – Parent Only Financial Statements – continued

The condensed balance sheets as of December 31, 2009 and 2008 are as follows:

	December 31,
	2009		2008
Assets
Cash and cash equivalents	$	2,l93,387	$	555,817
Investment in subsidiary		8,581,286		8,757,652
Total assets	$	10,774,673	$	9,313,469
Liabilities and Shareholders’ Equity
Other liabilities	$	46,740	$	1,500
Shareholders’ equity		10,727,933		9,311,969
Total liabilities and shareholders’ equity	$	10,774,673	$	9,313,469

The condensed statements of operations for the years ended December 31, 2009, and 2008 are as follows:

	For the Years Ended December 31,
	2009			2008
Interest income	$	—		$	—
Interest expense		—			—
Net interest income		—			—
Non-interest expense
Salaries and benefits		59,567			(40,322	)
Occupancy & equipment expense		—			—
Professional fees		142,075			101,100
Printing and office supplies		—			—
Other expense		54,879			36,555
Total non-interest expense		256,521			97,333
Income taxes		—			—
Net (loss) income before equity in loss of subsidiary		(256,521	)		(97,333	)
Equity in loss of subsidiary		(1,656,401	)		(1,414,769	)
Net loss		($1,912,922	)		($1,512,102	)
Dividend on preferred stock		(64,055	)		—
Accretion of discount on preferred stock		(11,207	)		—
Effective dividend on preferred stock		(75,262	)		—
Net loss applicable to common shareholders		($1,988,184	)		($1,512,102	)

17

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 – Parent Only Financial Statements – continued

     The condensed statements of cash flows for the years ended December 31, 2009 and 2008 are as follows:

	2009			2008
Cash flows from operating activities
Net loss	$	(1,912,922	)	$	(1,512,102	)
Loss of subsidiary		1,656,401			1,414,769
Share based payments expense		22,906			4,553
Net increase (decrease) in other liabilities		45,240			(68,500	)
Net cash (used in) provided by operating activities		(188,375	)		(161,280	)
Cash flows from investing activities
Investment in subsidiary		(1,489,000	)		—
Net cash used in investing activities		(1,489,000	)		—
Cash flows from financing activities
Proceeds from sale of senior preferred stock		3,379,000			—
Dividend on senior preferred stock		(64,055	)		—
Net cash provided by financing activities		3,314,945			—
(Decrease) increase in cash and cash equivalents		1,637,570			(161,280	)
Cash and cash equivalents at the beginning of the period		555,817			717,097
Cash and cash equivalents at the end of the period	$	2,193,387		$	555,817

Note 14 – Off Balance Sheet Risk

Credit-related Financial Instruments

The Corporation is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Corporation’s exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

18

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 – Off Balance Sheet Risk - continued

At December 31, 2009 and 2008, the following financial instruments were outstanding whose contract amounts represent credit risk:

	Contract Amount
	2009		2008
Commitments to grant loans	$	9,570,000	$	2,400,000
Unfunded commitments under lines of credit	$	9,636,000	$	11,655,000
Commercial and standby letters of credit	$	603,000	$	110,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is committed.

Commercial and standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are used primarily to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved is extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary.

Collateral Requirements- To reduce credit risk related to the use of credit-related financial instruments, the Corporation might deem it necessary to obtain collateral. The amount and nature of the collateral obtained are based on the Corporation’s credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant, and equipment, and real estate.

If the counterparty does not have the right and ability to redeem the collateral or the Corporation is permitted to sell or re-pledge the collateral on short notice, the Corporation records the collateral on its balance sheet at fair value with a corresponding obligation to return it.

Legal Contingencies- Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Corporation’s financial statements.

19

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 – Minimum Regulatory Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The prompt corrective action regulations provide four classifications, well capitalized, adequately capitalized, undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Bank was well-capitalized as of December 31, 2009 and 2008.

The Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008 are presented in the following table (000s omitted):

						For Capital					To be
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2009
Total risk-based capital (to risk weighted assets) Bank of Birmingham	$	9,467		12.0	%	$	6,318		8.0	%	$	7,897		10.0	%
												��
Tier I capital (to risk weighted assets) Bank of Birmingham	$	8,468		10.7	%	$	3,159		4.0	%	$	4,738		6.0	%
Tier I capital (to average assets) Bank of Birmingham	$	8,468		9.4	%	$	3,590		4.0	%	$	4,488		5.0	%
As of December 31, 2008
Total risk-based capital (to risk weighted assets) Bank of Birmingham	$	9,345		16.6	%	$	4,491		8.0	%	$	5,614		10.0	%
Tier I capital (to risk weighted assets) Bank of Birmingham	$	8,635		15.4	%	$	2,246		4.0	%	$	3,369		6.0	%
Tier I capital (to average assets) Bank of Birmingham	$	8,635		12.8	%	$	2,695		4.0	%	$	3,369		5.0	%

20

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – QUARTERLY RESULTS OF OPERATIONS(unaudited)

The following table summarizes the Corporation’s quarterly results for the years ended December 31, 2009 and 2008 (000s omitted):

	For the Three-Month Period ended
	March 31			June 30			September 30			December 31
2009
Interest income	$	883		$	938		$	1,085		$	1,153
Interest expense		340			328			337			340
Net interest income		543			610			748			813
Provision for loan losses		34			115			32			300
Net interest income after provision for loan losses		509			494			716			513
Noninterest income		26			25			27			21
Noninterest expense		848			991			867			1,538
Net loss before income taxes		(313	)		(472	)		(123	)		(1,004	)
Income taxes		—			—			—			—
Net loss	$	(313	)	$	(472	)	$	(123	)	$	(1,004	)
Dividend on preferred stock		—			(6	)		(22	)		(36	)
Accretion of discount		—			(3	)		(4	)		(5	)
Net loss applicable to common shareholders	$	(313	)	$	(481	)	$	(149	)	$	(1,045	)
Net loss per share
Basic	$	(0.17	)	$	(0.26	)	$	(0.08	)	$	(0.58	)
Diluted	$	(0.17	)	$	(0.26	)	$	(0.08	)	$	(0.58	)

21

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – QUARTERLY RESULTS OF OPERATIONS(unaudited) - continued

	For the Three-Month Period ended
	March 31			June 30			September 30			December 31
2008
Interest income	$	728		$	797		$	883		$	901
Interest expense		314			340			352			381
Net interest income		414			457			531			520
Provision for loan losses		50			95			109			130
Net interest income after provision for loan losses		364			362			422			390
Noninterest income		38			24			35			20
Noninterest expense		1,027			785			692			663
Net loss before income taxes		(625	)		(399	)		(235	)		(253	)
Income taxes		—			—			—			—
Net loss	$	(625	)	$	(399	)	$	(235	)	$	(253	)
Net loss per share
Basic	$	(0.35	)	$	(0.22	)	$	(0.13	)	$	(0.14	)
Diluted	$	(0.35	)	$	(0.22	)	$	(0.13	)	$	(0.14	)

NOTE 17 – SHAREHOLDERS’ EQUITY

Participation in the TARP Capital Purchase Program

On April 24, 2009, the Corporation entered into a Securities Purchase Agreement with the U.S. Treasury under the Capital Purchase Program. Pursuant to the Securities Purchase Agreement, the Corporation issued and sold to the Treasury (i) 1,635 shares of the Corporation’s Series A Preferred Shares(liquidation preference $1,000 per share, and (ii) the Warrant to purchase 82 shares of the Corporation’s preferred stock (preferred stock B) which was immediately exercised (liquidation preference $1,000 per share). The total proceeds received of $1.635 million was allocated between the Series A and Series B stock on a relative fair value basis. The discount/premium will be amortized over a five year period.

On December 18, 2009 we issued 1,744 shares of Series C, no par value ($1,000 liquidation preference per share) fixed rate cumulative perpetual preferred stock (Preferred Stock) to the U.S. Treasury in exchange for $1.744 million under the Capital Purchase Program (CPP). The same rules and restrictions below apply to all preferred stock issued under the program. All of the Preferred Stock qualifies as Tier 1 capital.

As a result of the CPP transaction, the Corporation is required to take certain actions, for so long as the Treasury holds any securities acquired from the Corporation pursuant to the CPP, to ensure that its executive compensation and benefit plans with respect to Senior Executive Officers (as defined in the relevant agreements) comply with Section 111(b) of Emergency Economic Stabilization Act of 2008 (“EESA”), as implemented by any guidance or regulations issued under Section 111(b) of EESA, and not adopt any benefit plans with respect to, or which cover, the Corporation’s Senior Executive Officers that do not comply with EESA, as amended by the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which was

22

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 – SHAREHOLDERS’ EQUITY - continued

passed by Congress and signed by the President on February 17, 2009. The applicable executive compensation standards generally remain in effect during the CPP Period and apply to the Corporation’s Senior Executive Officers (which for purposes of the ARRA and the CPP agreements, includes the Corporation’s Chief Executive Officer, its Chief Financial Officer, and the next three most highly-compensated executive officers, even though the Corporation’s senior executive officers consist of a smaller group of executives for purposes of the other compensation disclosures in this proxy statement).

The Preferred Stock A and C pays cumulative quarterly cash dividends at a rate of 5% per annum on the $1,000 liquidation preference for the first five years and at a rate of 9% per year thereafter. Preferred Stock B pays cumulative quarterly cash dividends at a rate of 9% per annum. In addition, all accrued and unpaid dividends on the Preferred Stock must be declared and the payment set aside for the benefit of the holders of Preferred Stock before any dividend may be declared on our common stock and before any shares of our common stock may be repurchased, subject to certain limited exceptions. Holders of shares of the Preferred Stock have no right to exchange or convert such shares into any other security of Birmingham Bloomfield Bancshares, Inc. and have no right to require the redemption or repurchase of the Preferred Stock. The Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed at any time with regulatory approval. The Treasury may also transfer the Preferred Stock to a third party at any time. The Corporation has the right to redeem the Preferred Shares at any time after consulting with its primary regulator, in which case the executive compensation standards would no longer apply to the Corporation.

23

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements throughout that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and the Bank. Words such as anticipates, believes, estimates, expects, forecasts, intends, is likely, plans, projects, variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may materially differ from what may be expressed or forecasted in the forward-looking statements. The Corporation undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to the following: the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; competitive pressures among depository institutions; interest rate movements and their impact on customer behavior and net interest margin; the impact of re-pricing and competitor’s pricing initiatives on loan and deposit products; the ability to adapt successfully to technological changes to meet customers’ needs and development in the market place; our ability to access cost-effective funding; changes in financial markets; changes in economic conditions in general and particularly as related to the automotive and related industries in the Detroit metropolitan area; new legislation or regulatory changes, including but not limited to changes in federal and/or state tax laws or interpretations thereof by taxing authorities; changes in accounting principles, policies or guidelines; and our future acquisitions of other depository institutions or lines of business.

OVERVIEW

The Corporation is a Michigan corporation that was incorporated in 2004 to serve as the holding company for a Michigan state bank, Bank of Birmingham (“Bank”). The Bank is a full service commercial bank headquartered in Birmingham, Michigan. The Bank serves businesses and consumers across Oakland and Macomb counties with a full range of lending, deposit and Internet banking services. Bank of Birmingham has continued to grow despite the economic downturn in the state of Michigan by lending with a strong focus on credit quality. General economic conditions have worsened, creating a difficult environment for banks in general and particularly in Michigan. Michigan has one of the highest foreclosure rates and unemployment rates in the country, a weakened manufacturing economy, high inventories of unsold residential housing, declining real estate values and increasing borrower defaults. The ripple effect of the struggling automotive manufacturing sector and its associated businesses has had a major impact on the area. According to the “Beige Book” published quarterly by the Federal Reserve, conditions in the Seventh reserve district over the last quarter of 2009 showed commercial real estate conditions deteriorated, but residential real estate activity began to pick up and that credit conditions improved marginally. While Oakland county is not immune to these issues, the demographics of the Birmingham Bloomfield area somewhat lessen the impact.

The Corporation received funds from the sale of its preferred stock under the U.S. Treasury’s Capital Purchase Program. Proceeds received during 2009 from this sale were $3.379 million which will be used to increase the strong capital position of the Bank.

24

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW–continued

During 2009, the Bank conducted a thorough review of its profitability and related cost structure. Changes were made to reduce the cost of funding and enhance the net interest margin while improving the overall structure of our balance sheet; a decision was made to close the unprofitable Bloomfield Hills branch location, and anticipated enhancements to our product offerings should all have a positive impact on ongoing profitability. Two key items had a negative impact on 2009 earnings for the Bank and Corporation of approximately $729,000. The items were: our decision to close the unprofitable Bloomfield Township location and increased deposit insurance premiums due to the overall state of the Federal Deposit Insurance fund.

After three years of unprofitable operation, a decision was made to close the Bloomfield Township branch and take a one time charge to current earnings to aid in the improvement of future earnings. During October 2009, an agreement was formalized with the leaseholder of the Bloomfield Township location to terminate the outstanding lease. One time costs related to the branch closure negatively impacted earnings in the amount of $609,330, with an expected future annual decrease in related expenses of approximately $250,000 per year.

On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points, extended the period of the Restoration Plan to seven years, and adopted an interim rule with request for comments imposing an emergency 20 basis point special assessment on June 30, 2009, which was collected on September 30, 2009, and allowing the FDIC to impose possible additional special assessments of up to 10 basis points thereafter to maintain public confidence in the Deposit Insurance Fund. The effect of these changes on the Bank of Birmingham was an increased regulatory assessments of approximately $120,000 over 2008 deposit insurance costs.

The growth and earnings performance of the Bank and the Holding Company may be affected by a myriad of Federal and state laws and various governmental regulatory authorities including, but not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Michigan Office of Financial and Insurance Regulation (the “OFIR”), the Internal Revenue Service and state taxing authorities as well as by management decisions and general economic conditions. These laws and agencies regulate the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The effect of such statutes, regulations and policies can be significant, as evidenced this past year with substantial changes to the financial institution reserve requirements imposed by the FDIC, and cannot be predicted with a high degree of certainty.

CRITICAL ACCOUNTING POLICIES

Allowance for loan losses

The Corporation performs a detailed quarterly review of the allowance for credit losses. The Corporation evaluates those loans classified as substandard, under its internal risk rating system, on an individual basis for impairment. The level and allocation of the allowance is determined primarily on management’s evaluation of collateral value, less the cost of disposal, for loans reviewed in this category. The remainder of the total loan portfolio is segmented into homogeneous loan pools with similar risk characteristics for evaluation. The Corporation uses factors such as, historical portfolio losses, national and local economic trends and levels of delinquency to determine the appropriate level and allocation of the allowance for loans in this grouping. In addition, due to the Corporation’s short operating history, it looks to historical results for similar banks of similar size and those

25

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES - continued

in similar geographic areas as a comparison. The Corporation’s policy dictates that specifically identified credit losses be recognized immediately by a charge to the allowance for credit losses. See also Note 1 to the financial statements.

Inherent risks and uncertainties related to determination of adequacy of the allowance for credit losses require management to depend on estimates, appraisals and evaluations of loans to prepare the analysis. Changes in economic conditions and the financial prospects of borrowers may result in changes to the estimates, appraisals and evaluations used. In addition, if circumstances and losses differ substantially from management’s assumptions and estimates, the allowance for credit losses may not be sufficient to absorb all future losses and net income could be significantly impacted.

Income Tax Valuation Allowance

The Corporation determines its tax liability under the Internal Revenue Code and its tax expense under Generally Accepted Accounting Principles. The result is a future net deductible amount or deferred tax asset. The Corporation which opened its subsidiary Bank in July 2006 has had a net operating loss in each year of operation which can be carried forward for a period not to exceed twenty years.

OPERATIONS

The Corporation’s (and the Bank’s) main office is located at 33583 Woodward Avenue, Birmingham, MI 48009. The building is a free-standing one story office building of approximately 8,300 square feet. The Bank also operated a branch office at 4145 West Maple Road in Bloomfield Township, MI, which was unprofitable and subsequently closed on January 18, 2010. The main office lease commenced in October 2005 and the bank exercised its first renewal option resulting in the lease being extended until October 2025. The main office lease has an additional ten year renewal option. The office lease related to the closed Bloomfield Township branch commenced in March 2006 and was terminated effective January 18, 2010 by an agreement with the leaseholder executed in October of 2009. During January 2010, a six month short term lease was executed for office space to house one of our business development officers. During 2009, the Corporation completed the sale of fixed rate cumulative preferred stock under the United States Treasury Capital Purchase Program. These funds provided additional capital to allow for continued growth over the next few years. Refer to the Capital Resources section for detailed information on the preferred stock.

The Bank will continue to focus on the lending, deposit and general banking needs in the community it serves. The Bank will investigate additional product and service offerings and will consider offering those that will be of benefit to our customers and the Bank.

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Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected Financial Information

The following sets forth the selected consolidated financial data for the years ended December 31, 2005 -2009. Information shown for 2005 is not comparable as the Corporation did not commence banking operations until July 26, 2006.

Selected Financial Condition Data(dollars in thousands)

	For the Year Ended December 31,
	2009			2008			2007			2006			2005
Total assets	$	92,637		$	67,299		$	47,260		$	23,704		$	640
Gross loans		79,656			56,841			37,107			12,914			—
Allowance for Loan Losses		1,174			710			560			195			—
Total deposits		81,465			57,748			36,262			10,229			—
Borrowings		—			—			—			—			1,709
Total stockholders equity (deficit)		10,728			9,312			10,760			13,338			(1,151	)
Summary of operations
Interest income		4,058			3,309			2,463			385			—
Interest expense		1,345			1,387			1,090			158			14
Net interest income		2,713			1,922			1,373			227			14
Provision for loan losses		480			384			465			195			—
Noninterest income		98			117			132			7			—
Noninterest expense		4,244			3,167			3,723			3,002			981
Loss before taxes		(1,913	)		(1,512	)		(2,683	)		(2,963	)		(995	)
Provision for income tax		—			—			—			—			—
Net loss	$	(1,913	)	$	(1,512	)	$	(2,683	)	$	(2,963	)	$	(995	)
Dividend on senior preferred stock		(64	)		—			—			—			—
Accretion of discount on pref stock		(11	)		—			—			—			—
Effective dividend on preferred stock A		(75	)		—			—			—			—
Net loss applicable to common shareholders	$	(1,988	)	$	(1,512	)	$	(2,683	)	$	(2,963	)	$	(995	)
Per share Data:
Basic earnings	$	(1.10	)	$	(0.84	)	$	(1.49	)	$	(4.19	)	$	(9,954.59	)
Diluted earnings	$	(1.10	)	$	(0.84	)	$	(1.49	)	$	(4.19	)	$	(9,954.59	)
Dividend declared		—			—			—			—			—

27

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected Financial Ratios:

	For the Year Ended
	December 31,
	2009			2008			2007			2006			2005
Total nonperforming assets as a percentage of total assets		—			—			—			—			—
Total nonperforming loans as a percentage of total loans		—			—			—			—			—
Total allowance for loan losses as a percentage of total loans		1.47	%		1.25	%		1.50	%		1.50	%		—
Return on average assets		-1.30	%		-2.47	%		-6.43	%		-37.62	%		-199.09	%
Return on average equity		-10.56	%		-15.19	%		-21.42	%		-44.89	%		—
Net interest margin		3.51	%		3.31	%		3.63	%		4.90	%		—
Average equity to average assets		12.32	%		16.28	%		30.01	%		-83.82	%		—

FINANCIAL CONDITION

Despite difficult business conditions for us and the surrounding area throughout 2009, the Corporation and Bank of Birmingham continued to lend increasing total assets 38.0%, or $25.3 million, to $92.6 million at December 31, 2009 from $67.3 million at December 31, 2008. The increase was achieved with continued strong focus on credit quality, and no increase in non-performing loans which remain at $0 again at December 31, 2009. The level of loan loss reserves was increased to 1.47% during 2009, up from 1.25% a year ago. While this decision reduced earnings by over $175,000, Management felt it was prudent given the current economy in which we operate. Total liabilities increased by $23.9 million, or 41.3% to $81.9 million at December 31, 2009 from $58.0 million at December 31, 2008. The bank employed a new strategy to lower its cost of funds and improve the structure of the balance sheet by adjusting the composition of its funding sources. The increased level of deposits, primarily certificates of deposits and non-interest bearing deposits were used to fund the growth in the loan portfolio. Total shareholders’ equity increased $1.4 million, or 15.2%, to $10.7 million at December 31, 2009 up from $9.3 million for the prior year end. This change was due to the current year net loss which was offset by an injection of capital via the U.S. Treasury’s Capital Purchase Program. While the average equity to average assets ratio of 12.32% is down from the previous year, it is still a solid position of “well capitalized” under the guidelines established by the federal bank regulators. Management monitors the capital levels of the Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well capitalized” institutions.

Changes made by management during the year to improve the structure of the balance sheet and reduce interest expenses contributed to the increase in the net interest margin. Charges against revenues this year were impacted by several key items: 1) the decision to increase the levels of loan loss reserves; 2) the special assessment charged to all institutions by the Federal Deposit Insurance Corporation; and 3) the decision to take a one time charge to current earnings to enhance of future earnings by closing the unprofitable branch location.

Cash and Cash Equivalents

Cash and cash equivalents increased $3.1 million, or 66.0%, to $7.8 million at December 31, 2009, up from $4.7 million at December 31, 2008. The Federal funds sold portion of this segment decreased $0.3 million, or 10.0%, to $3.1 million at December 31, 2009. Changes were made to improve the flexibility of funding sources while increasing related income on cash equivalents.

28

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Investments

Total securities available-for-sale decreased 1.0%, or $.1 million, to $3.8 million at December 31, 2009, compared to $3.9 million at December 31, 2008. The change in investment securities is primarily attributable to runoff on the mortgage backed securities during the course of the year. The Corporation had no held-to-maturity securities as of December 31, 2009 and 2008.

The following table presents the maturity schedule of all securities (based on estimated fair value) held and weighted average yield of those securities, as of December 31, 2009 (000s omitted):

				After One but					After Five but								Mortgage-Backed
	Within One Year			Within Five Years					within Ten					After Ten Years			Securities					Total
	Amount		Yield	Amount		Yield			Amount		Yield			Amount		Yield	Amount		Yield			Amount		Yield
U.S. Treasury & Government agencies	$	—		$	2,360		2.99	%	$	—				$	—		$	—				$	2,360		2.99	%
FHLB stock									$	162		0.0	%										162		0.00	%
Municipal		—			204		3.25	%		—					—			—					204		3.25	%
Mortgage-backed securities		—			—					—					—			1,109		6.46	%		1,109		6.46	%
Total	$	—		$	2,564				$	162				$	—		$	1,109				$	3,835

Maturity information does not incorporate any call provisions that the various securities may contain. Mortgage-backed securities do not have specific maturity dates, and thus have been incorporated into the above table as a separate maturity column. The Federal Home Loan Bank stock is restricted for sale back to the Federal Home Loan Bank. Its carrying value is equal to its estimated fair value above. An analysis of the amortized cost and estimated fair market value of the investment portfolio is contained in Note 3 to the Corporation’s Consolidated Financial Statements.

Loans, Credit Quality and Allowance for Loan Losses

The following table summarizes the Corporation’s loan mix at December 31, 2009 and 2008 (000’s omitted):

	2009		2008
Commercial, financial and agricultural	$	17,186	$	8,242
Real estate-construction		518		3,000
Real estate-mortgage		61,440		44,592
Consumer		512		1,007
Total	$	79,656	$	56,841

Loans receivable increased $22.8 million or 40.1%, to $79.6 million at December 31, 2009, up from $56.8 million at December 31, 2008. As noted in Note 4 to the consolidated financial statements, the largest single category increase within loans was commercial real estate which increased by $12.8 million. These loans are for the most part owner occupied properties. Equity lines of credit increased $1.0 million or 10.2% to $11.4 million at December 31, 2009. This increase is due mainly to increased draws on existing lines. Real estate mortgages on multifamily properties increased approximately $4.9 million or 64.7% to $12.6 million at December 31, 2009. Consumer loans decreased approximately $495,000 or 49.2% to $512,000 at December 31, 2009. Management expects continued loan growth in 2010, primarily in the commercial and commercial real estate loan portfolios. The growth in the commercial lending area will be driven by continued business development efforts.

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Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Loans, Credit Quality and Allowance for Loan Losses - continued

The following table presents the remaining maturity of total loans outstanding for the categories shown at December 31, 2009, based on scheduled principal repayments, as well as categorized as fixed or variable rate loans (000s omitted):

			Due After 1
	Due Within 1		but Within 5		Due After 5
	Year		Years		Years		Total		Fixed		Variable
Commercial, financial and agricultural	$	4,485	$	11,820	$	881	$	17,186	$	17,108	$	78
Real estate — construction		—		518		—		518		518		—
Real estate — mortgage		10,731		37,471		13,238		61,440		54,085		7,355
Consumer		104		408		—		512		499		13
Total	$	15,320	$	50,217	$	14,119	$	79,656	$	72,210	$	7,446

The majority of loans originated by the Bank are fixed rate loans that have a maturity which will occur within five years. Closed-end commercial loans, though they may mature within five years, typically have principal amortization periods that exceed five years. Principal balances on commercial lines of credit are typically due in full at maturity (usually one year).

The allowance for loan losses was $1.174 million, or 1.47%, of loans at December 31, 2009 compared to $710,000 or 1.25% of loans at December 31, 2008. This increase reflects management’s evaluation of the local economy and its potential impact upon its customers’ general ability to repay debt in this environment.

An analysis of the allowance for loan losses follows (000s omitted):

	2009			2008			2007
Balance at beginning of year	$	710		$	560		$	195
Provision for loan losses		480			384			465
Loans charged off		(18	)		(318	)		(100	)
Recoveries of loans previously charged off		2			84			—
Balance at end of year	$	1,174		$	710		$	560
Net charge-off rate		0.00	%		0.48	%		0.43	%

There were three loans totaling approximately $485,000 that were more than 30 days past due as of December 31, 2009. These loans have subsequently been brought to a current status. There were no past due loans as of December 31, 2008. Nonperforming loans, which represents non-accruing loans and loans past due 90 days or more and still accruing interest, were $199,999 at December 31, 2009 and $0 in 2008. Loans are placed in non-accrual status when, in the opinion of management, uncertainty exists as to the ultimate collection of principal and interest. Commercial loans are reported as being in non-accrual status if: (a) they are maintained on a cash basis because of deterioration in the financial position of the borrower, (b) payment in full of interest or principal is not expected, or (c) principal or interest has been in default for a period of 90 days or more. If it can be documented that the loan obligation is both well secured and in the process of collection, the loan may remain on accrual status. However, if the loan is not brought current before becoming 120 days past due, the loan is reported as non-accrual. A non-accrual asset may be restored to accrual status when none of its principal or interest is due and unpaid, when it otherwise becomes well secured, or is in the process of collection.

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Loans, Credit Quality and Allowance for Loan Losses - continued

Management evaluates the condition of the loan portfolio on at least a quarterly basis to determine the adequacy of the allowance for credit losses. Management’s evaluation of the allowance is further based on consideration of actual loss experience, the present and prospective financial condition of borrowers, adequacy of collateral, industry concentrations within the portfolio, and general economic conditions. Management believes that the present allowance is adequate, based on the broad range of considerations listed above.

The following tables detail the allocation among individual loan portfolios within the allowance for loan and lease losses at December 31, 2009 and 2008 (000s omitted):

			2009								2008
			% of Total			% of Loans to					% of Total			% of Loans to
	Allowance		Allowance			Total Loans			Allowance		Allowance			Total Loans
Commercial	$	196		16.69	%		21.58	%	$	103		14.51	%		14.55	%
Real estate — construction		6		0.53	%		0.65	%		37		5.21	%		5.27	%
Real estate — mortgage		724		61.66	%		77.13	%		437		61.55	%		78.41	%
Consumer		248		21.12	%		0.64	%		133		18.73	%		1.77	%
	$	1,174		100.00	%		100.00	%	$	710		100.00	%		100.00	%

Criticized and Classified Loans

The following tables present criticized and classified loans of the Bank at December 31, 2009 and 2008 (000s omitted):

			Loan Risk Ratings
	Special
	Mention		Substandard		Doubtful		Loss		Total
Loan Type
December 31, 2009
Commercial	$	1,640	$	1,571	$	—	$	—	$	3,211
Real estate — construction		518		—		—		—		518
Real estate — mortgage		3,027		962		—		—		3,989
Consumer		345		917		—		—		1,262
Total	$	5,530	$	3,450	$	—	$	—	$	8,980
December 31, 2008
Commercial	$	1,447	$	381	$	—	$	—	$	1,828
Real estate — construction		1,900		—		—		—		1,900
Real estate — mortgage		5,216		121		—		—		5,926
Consumer		—		589		—		—		—
Total	$	8,563	$	1,091	$	—	$	—	$	9,654

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Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Criticized and Classified Loans - continued

Loans risk-rated as special mention, are considered criticized loans, exhibiting some potential credit weakness that requires additional attention by management. Loans risk-rated as substandard or higher are considered classified loans exhibiting well-defined credit weakness. The Bank’s credit administration function is designed to provide increased information on all types of loans to identify adverse credit risk characteristics in as timely a manner as possible. Total criticized and classified loans decreased $0.8 million, or 9.0%, to $8.8 million at December 31, 2009 from $9.6 million at December 31, 2008. The change was the result of a $3.0 million decrease in special mention loans offset by a $2.2 million increase in substandard accounts. The loans categorized as substandard by management are not in non-accrual status and are currently paying as agreed. There were no loans that were risk rated doubtful or loss at either December 31, 2009 or 2008. Management closely monitors each loan adversely criticized or classified and institutes appropriate measures to eliminate the basis of criticism.

The primary risk elements considered by management regarding each consumer and residential real estate loan are lack of timely payment and loss of real estate values. Management has a reporting system that monitors past due loans and has adopted policies to pursue its creditor’s rights in order to preserve the Bank’s position. The primary risk elements concerning commercial and industrial loans and commercial real estate loans are the financial condition of the borrower, the sufficiency of collateral, and lack of timely payment. Management has a policy of requesting and reviewing periodic financial reporting from its commercial loan customers and verifies existence of collateral and its value.

Although management believes that the allowance for credit losses is adequate to absorb losses as they arise, there can be no assurance that the Bank will not sustain losses in any given period that could be substantial in relation to the size of the allowance for credit losses. It must be understood that inherent risks and uncertainties related to the operation of a financial institution require management to depend on estimates, appraisals and evaluations of loans to prepare the Corporation’s financial statements. Changes in economic conditions and the financial prospects of borrowers may result in changes to the estimates, appraisals and evaluations used. In addition, if circumstances and losses differ substantially from management’s assumptions and estimates, the allowance for loan losses may not be sufficient to absorb all future losses and net income could be significantly impacted.

Off-Balance Sheet Items

The following is a summary of outstanding commitments by the Bank to grant loans, unfunded commitments under lines of credit and letters of credit at December 31, 2009 and 2008 (000s omitted):

	2009		2008
Commitments to extend credit	$	9,570	$	2,400
Unfunded commitments under lines of credit		9,636		11,655
Commercial and standby letters of credit		603		110
Total	$	19,809	$	14,165

Outstanding commitments to grant loans, lines of credit and letters of credit increased $5.6 million, or 39.8% to $19.8 million at December 31, 2009 from $14.2 million at December 31, 2008. The increase in commitments to extend credit is primarily due to funding of new loan commitments made during 2009. The decrease in unfunded commitments under lines of credit is due primarily to a reduction in the number of home equity lines of credit and a slight increase in the usage on commercial lines. Management does not expect that all commitments will result in funded loans.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Deposits

Total deposits increased $23.7 million, or 41.1%, to $81.4 million at December 31, 2009 from $57.7 million at December 31, 2008. Specifically, non-interest bearing deposits increased $3.3 million, or 63.5%, to $8.5 million at December 31, 2009 from $5.2 million at December 31, 2008. Interest bearing deposits increased $20.4 million, or 38.9%, to $73.0 million at December 31, 2009 from $52.6 million at December 31, 2008. NOW accounts which, except for limited circumstances, are owned by individuals, remained unchanged year over year. Savings increased $10.7 million or 980.2% at the end of 2009 versus 2008 and was the largest growing segment of the deposit base. The dramatic increase is due mainly to customers’ uncertainty in the markets and their reluctance to lock in to longer term certificates of deposits given the low rate environment. Certificates of deposit (CD’s) increased by $11.4 million to $45.5 million at December 31, 2009 from $34.1 million at December 31, 2008. The increase is attributable to business development efforts, special rate promotions, and participation in an on-line marketing service which facilitates deposit acquisition in the wholesale CD market. Management consciously extended the duration of the deposit portfolio during the year to take advantage of lower rates and to improve the structure of the overall balance sheet.

	As of December 31, 2009					As of December 31, 2008
(dollars in thousands)	Balance		Percentage			Balance		Percentage
Noninterest bearing demand	$	8,495		10.43	%	$	5,195		6.38	%
NOW accounts		7,894		9.69			7,882		9.68
Money market		7,815		9.59			9,480		11.64
Savings		11,785		14.47			1,091		1.34
Time deposits under $100,000		13,240		16.25			13,089		16.07
Time deposits over $100,000		32,236		39.57			21,011		36.37
Total deposits	$	81,465		100.00	%	$	57,748		100.00	%

SHAREHOLDERS’ EQUITY

Total shareholders’ equity increased $1.4 million, or 15.2%, to $10.7 million at December 31, 2009 up from $9.3 million for the prior current year net loss which was year end. This change reflects the injection of capital via the U.S. Treasury’s Capital Purchase Program offset by the current year net loss. See “Liquidity and Capital Resources; Asset / Liability Management” below for additional information on our shareholder’s equity. Additional paid in capital increased approximately $22,900 to $489,500 reflective of additional share based compensation, as noted in Note 1 and Note 7 of the consolidated financial statements. The additional paid-in-capital represents an offset to the expense recognized for the costs associated with stock options issued to certain employees. Accumulated other comprehensive income includes net unrealized gains on the Bank’s available-for sale investment securities as noted in Note 3.

RESULTS OF OPERATIONS

Net Loss

The Corporation had a net loss of $1.9 million for the year of 2009 compared to a net loss of $1.5 million for the prior year end. The year end financial results were negatively impacted by regulatory changes, a move to increase the loan loss reserve and a one time charge to earnings to close the unprofitable branch location. The Corporation benefited from increased net interest income provided by continued loan growth, a reduction in the cost of funds and other non-interest expenses as management continued efforts to reduce overall expenses.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Interest Income

2009.Net interest income for the period ended December 31, 2009 increased 41.2% or $0.8 million compared with the same period in 2008. Average loan yields and interest bearing due from banks yields dropped by 24 basis points and 203 basis points respectively as the effect on rate changes that took effect in late 2008 impacted the full year of 2009. The net interest margin increased 20 basis points to 3.51% for 2009 versus 3.31% for the same period in 2008 primarily due to the reduction in cost of funds from 3.87% in 2008 to 2.14% in 2009. The lower cost of funds was achieved by a change in pricing strategy to be more competitive in the local market instead of the leader and a reduction of higher rate term certificates of deposit, and / or rollover of the higher rate certificates into lower rate products.

2008.Net interest income for the twelve months ended December 31, 2008 increased $0.5 million, or 40.0%, to $1.9 million compared to $1.4 million for the same period in 2007. The increase in net interest income was primarily attributable to increases in the average balances within the loan portfolio that more than offset the decreases in yield caused by the reductions in the prime lending rate. Further, with the declines in interest rates, the average rate paid on deposits decreased in the current year to 3.08% down from 4.42% in 2007. Total interest income increased by $0.8 million, or 34.3%, to $3.3 million for the twelve months ended December 31, 2008 compared to $2.5 million during the same period in 2007. The increase in the loan portfolio in the current year more than offset the continued decreases in the prime lending rate resulting in a net increase in interest income. Interest expense increased by $0.3 million, or 27.3%, to $1.4 million for the twelve months ended December 31, 2008 compared to $1.1 million during the same period in 2007. Increases in the level of time deposits, which was offset by a decrease in rates paid on interest bearing deposits, caused the increase in interest expense.

34

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Interest Income - continued

The following table presents the Corporation’s consolidated average balances of interest-earning assets, interest-bearing liabilities, and the amount of interest income or interest expense attributable to each category, the average yield or rate for each category, and the net interest margin for the years ended December 31, 2009, and 2008 (000s omitted). Average loans are presented net of unearned income and the allowance for loan and lease losses. Interest on loans includes loan fees.

	2009							2008
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
Interest-earning assets:
Loans receivable	$	64,992	$	3,876		5.96	%	$	49,244	$	3,052		6.20	%
Securities available for sale		3,736		152		4.06	%		2,944		139		4.70	%
Federal funds sold		2,983		4		0.14	%		5,349		116		2.17	%
Interest-bearing balances with other financial institutions		5,672		27		0.47	%		464		2		0.49	%
Total interest-earning assets		77,383		4,059		5.25	%		58,001		3,309		5.70	%
Non-interest earning assets:
Cash and due from banks		1,370							1,157
All other assets		1,559							2,010
Total assets	$	80,312						$	61,168
Interest-bearing liabilities:
NOW accounts	$	7,919		64		0.81	%	$	7,752		153		1.98	%
Money markets		10,027		114		1.14	%		11,912		267		2.24	%
Savings deposits		8,646		139		1.61	%		661		12		1.75	%
Time deposits		36,187		1,028		2.84	%		24,681		955		3.87	%
Total interest-bearing liabilities		62,779		1,345		2.14	%		45,006		1,387		3.08	%
Non-interest bearing demand deposits		7,269							5,935
Other liabilities		366							271
Total liabilities		70,414							51,212
Shareholders’ equity		9,898							9,956
Total liabilities and shareholders’ equity	$	80,312						$	61,168
Net interest income			$	2,714						$	1,922
Net spread						3.10	%						2.62	%
Net interest margin(1)						3.51	%						3.31	%
Ratio of interest-earning assets to interest-bearing liabilities						123.26	%						128.87	%

⁽¹⁾ Net interest earnings divided by average interest-earning assets.

The Corporation’s net interest margin increased 20 basis points, to 3.51% for the year ended December 31, 2009 compared to 3.31% for the same period in 2008, while the spread increased 48 basis points over the same period. The increase in both the spread and net interest margin is attributable to decreases in the cost of funds from the lower interest environment and management’s efforts to reduce interest expense and restructure the balance sheet to help mitigate the effect of changing interest rates. The yield on loans receivable decreased to 5.96% for the year ended December 31, 2009 down from 6.20% for the prior year. This along with decreases in the earnings rates on investments and Fed funds sold impacted the margin and earnings for the year.

35

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Interest Income - continued

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change (the sum of the prior columns). The changes attributable to the combined impact of volume and rate have been allocated on a proportional basis between changes in rate and volume (000s omitted):

	2009-2008									2008-2007
	Net			Increase/(decrease) due to						Net			Increase/(decrease) due to
	Change			Volume			Rate			Change			Volume			Rate
Interest-earning assets:
Loans receivable	$	824		$	976		$	(152	)	$	1,364		$	1,919		$	(555	)
Securities available-for-sale		13			37			(24	)		(8	)		17			(25	)
Federal funds sold		(112	)		(51	)		(61	)		(512	)		(351	)		(161	)
Interest-bearing balances with other financial institutions		25			26			(1	)		2			2			—
Total interest-earning assets		750			988			(238	)		846			1,587			(741	)
Interest-bearing liabilities:
NOW Accounts		(89	)		3			(93	)		(93	)		48			(141	)
Money markets		(153	)		(42	)		(111	)		(172	)		75			(247	)
Savings deposits		127			140			(12	)		8			7			1
Time deposits		73			445			(372	)		554			871			(317	)
Total interest-bearing liabilities		(42	)		546			(588	)		(297	)		1,001			(704	)
Net change in net interest income	$	792		$	442		$	350		$	549		$	586		$	(37	)

Provision for Loan Losses

The provision for loan losses was $480,000, $384,000 and $465,000 for the years ended December 31, 2009, 2008 and 2007, respectively. See also “Loans, Credit Quality and Allowance for Loan Losses” discussed previously.

Non-interest Income

2009.Non-interest income for 2009 decreased by $19,000 or 16% to $98,000 for December 31, 2009 compared to $117,000 for the same period in 2008. Deposit fees and charges increased slightly to $70,000 in 2009 versus $69,000 in 2008. Loan fees and charges were down by $5,000 or 28% in 2009 due mainly to the continued reduction in mortgage loan activity, which decreased income earned on originations. Other non-interest income decreased by $15,000 or 50% to $15,000 in 2009 versus $30,000 for the year ended December 31, 2008. The difference is attributable to a reduction in the gains recognized for calls/sales on investment securities as the volume of these investment calls/ sales decreased in 2009.

36

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Non-interest Income-continued

2008.Total non-interest income decreased $15,000, or 11.0%, to $117,000 for the year ended December 31, 2008 compared to $132,000 for the same period in 2007. Loan fees and charges decreased to approximately $18,200 for the year ended December 31, 2008 compared to $63,100 for the same period in 2007. This decrease is primarily due to a decrease in mortgage loan activity, which in turn has decreased income earned on mortgage loans originated for third parties. Deposit fees and charges increased $20,700, or 42.9%, to $69,000 for the year ended December 31, 2008 compared to $48,300 for the same period in 2007. This increase is consistent with the continued growth in deposit balances in the current year. Other income increased to approximately $30,300 for the year ended December 31, 2008, up from $20,600 for the same period in 2007. This increase is due primarily to gains recognized for calls/sales on certain investment securities in 2008.

Non-interest Expense

2009.Non-interest expense for the year ended December 31, 2009 increased $468,000 or 15% to $3.6 million before the one time charge to earnings for the closure of the unprofitable branch location from $3.2 million for the same period in 2008. Including the one time charge to earnings, 2009 costs increased 34% or $1.1 million as compared to 2008. Salaries and Benefits expense increased $160,000 due to the addition of staff (Chief Financial Officer and additional relationship manager) in addition to contractual salary increases for Mr. Farr and Mr. Krajacic which went into effect mid-year. Data processing expenses increased to $212,000 in 2009 versus $185,000 in 2008, or 15%. These expenses are associated with increased transaction volumes related to our customers and the deployment of remote deposit capture to commercial customers. Professional fees increased $62,000 to $340,000 or 22% during 2009 versus $278,000 for 2008. Increased audit charges as a result of our increased assets size, legal fees related to commercial credits and other consulting charges related to cash management services accounted for the increase. Other non-interest expense increased $222,000 over 2008 due primarily to the increased assessments by the FDIC for deposit insurance in the amount of $167,000, increased business development and related charges of $22,000, and other charges associated with growth and / or volume, such as insurance, trade association dues, and telecommunications increased by over $18,000.

2008.Non-interest expense for the year ended December 31, 2008 and 2007 was $3.2 million and $3.7 million, respectively. Salaries and benefits decreased approximately $400,000, or 22.1%, to $1.4 million for the year ended December 31, 2008, down from $1.8 million for the same period of 2007. In the first quarter of 2008, management of the Corporation continued to examine the business trends to date and reduced staffing in several areas accordingly. Severance costs totaling approximately $134,000 were included in the salaries and benefits costs in the first quarter of 2008. After consideration of the severance costs in the first quarter of 2008, the Corporation began to see the benefit of reduced compensation costs in the latter nine months of 2008. Occupancy expenses decreased to $820,500 for 2008, down from $858,000 in 2007. This decrease is due primarily to lower levels of depreciation discussed below. Data processing expenses were $185,000 for the year ended December 31, 2008 compared to $176,000 for the same period in 2007. The Corporation incurred expenses relating to initial ATM deployments in the first quarter of 2007, and no such costs were incurred in the current year. These increased costs related to 2007 were offset by increases in volume in the current year which is the basis for most of the data processing costs and therefore increased costs. Advertising expenses were $74,000 for 2008, down approximately $111,500 as compared to the same period in 2007. In 2007, the Corporation incurred higher levels of advertising and promotional costs aimed at increasing name recognition in the Corporation’s principal markets and growth in both loan and deposit portfolios. Professional fees were $278,100 for the year ended December 31, 2008 compared to $261,200 in 2007. Audit and legal costs have increased with increased loan activity and complexity of the Corporation. Other expenses increased to $361,300 in 2008 compared to $338,500 in 2007. This increase is due in large part to regulatory assessments, correspondent bank costs and expenses associated with the Michigan Business Tax incurred in the current year.

37

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Income Taxes

No income tax expense or benefit was recognized in 2009, 2008, 2007 or 2006 due to the tax loss carry-forward position of the Corporation. See Note 8 to the financial statements. An income tax benefit may be booked in future periods when the Corporation begins to become profitable and management concludes that profitability will be sustainable for the foreseeable future.

LIQUIDITY AND CAPITAL RESOURCES; ASSET/LIABILITY MANAGEMENT

The management team has responsibility for developing and recommending liquidity and risk management policies including but not limited to the determination of internal operating guidelines, contingency plans, change management and pricing to the Asset/Liability Committee (ALCO) of the Board of Directors. Management ensures that the liquidity of a bank allows it to provide funds to meet its cash flow needs, such as loan requests, outflows of deposits, other investment opportunities and general operating requirements, under multiple operating scenarios. While the current structure of the Corporation and the Bank are not complex, the objective in the management of liquidity and capital resources is to be able to take advantage of business opportunities that may arise. The major sources of liquidity for the Bank have been deposit growth, federal funds sold, and loans which mature within one year. During 2009, the Corporation and the Bank strengthened its liquidity position and contingency plans. The Bank is now a member of the Federal Home Loan Bank of Indianapolis and has been approved for access to funding via the discount window, and the ALCO committee has approved alternate funding sources to add flexibility should the need arise. Large deposit balances which might fluctuate in response to interest rate changes are closely monitored. These deposits consist mainly of certificates of deposit over $100,000. We anticipate that we will have more than sufficient funds available to meet our future commitments. As of December 31, 2009, off balance sheet loan commitments totaled $19.8 million. As a majority of the unused commitments represent commercial and equity lines of credit, the Bank expects, and experience has shown that only a small portion of the unused commitments will normally be drawn upon.

The largest uses and sources of cash and cash equivalents for the Corporation for the year ended December 31, 2009, as noted in the Consolidated Statement of Cash Flows, were primarily loan funding and deposit origination. The uses of cash in investing activities were largely due to the increase in loans of $22.8 million. Offsetting the uses of cash in investing activities, was the cash provided from financing activities which included net increases in deposits of $23.7 million and proceeds from preferred stock issued under the U.S. Treasury’s Capital Purchase Program.

The following table presents loan commitments by time period as of December 31, 2009 (000s omitted):

	Amount of commitment expiration per period
			Less Than 1						More than 5
	Total		Year		1-3 Years		3-5 Years		Years
Commitments to grant loans	$	9,570	$	9,570	$	—	$	—	$	—
Unfunded commitments under lines of credit		9,636		4,182		1,906		694		2,854
Commercial and standby letters of credit		603		603		—		—		—
Total	$	19,809	$	14,355	$	1,906	$	694	$	2,854

Commitments to grant loans are governed by the Corporation’s credit underwriting standards, as established in the Corporation’s Loan Policy. As the above schedule illustrates, in general, it is the Corporation’s practice to grant loan commitments for a finite period of time, usually lasting one year or less. The most significant departure from this practice involves home equity lines of credit (HELOCs). The Corporation’s equity lines have a contractual draw period exceeding 5 years. The Corporation has the ability to suspend the draw privileges on a HELOC where a default situation or other impairment issue is identified.

38

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Contractual Obligations

The following table presents contractual obligations as of December 31, 2009 (000s omitted):

	Payments due by period
			Less Than 1						More than 5
	Total		Year		1-3 Years		3-5 Years		Years
Certificates of deposit	$	45,476	$	21,453	$	23,573	$	450	$	—
Capital lease obligations		—		—		—		—		—
Operating lease obligations		4,153		346		464		483		2,976
Purchase agreements		—		—		—		—		—
Total	$	49,629	$	21,799	$	24,037	$	933	$	2,976

Long-term obligations consist of time deposits (certificates of deposit) and operating lease obligations. The above schedule represents principal payments only and does not include interest (where applicable).

The Corporation has contractual payments due on time deposits totaling $21.5 million in 2010. The Corporation anticipates that a significant portion of maturing time deposits will be renewed and retained. Depending on the economic and competitive conditions at the time of maturity, the rates paid on renewed time deposits may differ from rates currently paid.

Capital Resources

Management closely monitors capital levels to provide for current and future business needs and to comply with regulatory requirements. Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The Corporation’s objective is to maintain its strong capital position, enhancing its ability to weather adverse conditions and to take advantage of business opportunities that may arise, while keeping the confidence of its customers and regulators. The Bank was well-capitalized as of December 31, 2009 and 2008. The Bank’s regulatory capital levels are presented in Note 15 to the consolidated financial statements.

Total shareholders’ equity increased slightly to $9.5 million at December 31, 2009, compared with $9.3 million at December 31, 2008. The Corporation’s average equity to average asset ratio was 12.32% at December 31, 2009, compared to 16.28% at December 31, 2008. The change in equity during 2009 resulted from the issuance of preferred stock pursuant to the Capital Purchase Program at the U.S. Treasury offset in part by the current year net loss. On April 24, 2009, the Company completed the sale of 1,635 shares of Series A fixed rate, cumulative perpetual preferred stock (liquidation preference of $1,000 per share) and a warrant to purchase 82 shares of Series B fixed rate, cumulative perpetual preferred stock (liquidation preference of $1,000 per share) to the U.S. Treasury. The warrant was immediately exercised by the U. S. Treasury. Dividends on the Series A preferred stock accrue at a rate of 5% per annum for the first five years and 9% per annum thereafter, and the dividends on the Series B preferred stock accrue at a rate of 9% per annum. On December 18, 2009, the Company completed the sale of an additional 1,744 shares of Series C fixed rate cumulative perpetual preferred stock to the U.S. Treasury (liquidation preference $1,000 per share). Dividends on the Series C preferred stock accrue at a rate of 5% per annum for the first five years and 9% thereafter. At December 31, 2009, the Corporation’s tier 1 and total risk-based capital ratios were 10.7% and 12.0%, respectively, compared with 15.4% and 16.6% in 2008. The decrease in the risk-based capital ratios was due to the relatively flat level of equity, while average assets continued to increase at the Bank. The Corporation’s tier 1 leverage ratio was 9.4% at December 31, 2009 compared with 12.8% at December 31, 2008.

39

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation faces market risk to the extent that both earnings and the fair value of its financial instruments are affected by changes in interest rates. The Corporation does not believe that there has been a material change in the nature of the Corporation’s substantially influenced market risk exposures, including the categories of market risk to which the Corporation is exposed and the particular markets that present the primary risk of loss to the Corporation.

The Corporation’s market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market factors, which are outside of the Corporation’s control. All information provided in this section consists of forward-looking statements. Reference is made to the section captioned “Forward Looking Statements” in this annual report for a discussion of the limitations on the Corporation’s responsibility for such statements. The following table provides information about the Corporation’s financial instruments that are sensitive to changes in interest rates as of December 31, 2009. The table shows expected cash flows from market sensitive instruments for each of the next five years and thereafter. The expected maturity date values for loans and securities were calculated without adjusting the instruments’ contractual maturity dates for expected prepayments. Maturity date values for interest bearing core deposits were not based on estimates of the period over which the deposits would be outstanding, but rather the opportunity for re-pricing. The Corporation believes that re-pricing dates, as opposed to expected maturity dates, may be more relevant in analyzing the value of such instruments and are reported as such in the following table.

The following table presents principal/notional contractual maturities at December 31, 2009 (000s omitted):

Principal Amount Maturing In:

	2010			2011			2012			2013			2014			Thereafter			Total		Fair Value
RATE-SENSITIVE ASSETS
Gross loans	$	8,080		$	6,881		$	10,169		$	12,222		$	21,644		$	20,735		$	79,731	$	80,126
Average interest rate		5.73	%		6.09	%		6.63	%		6.43	%		6.61	%		4.17	%
Securities available for sale	$	2,342		$	200		$	316		$	0		$	342		$	259		$	3,459	$	3,673
Average interest rate		2.99	%		3.25	%		7.1	%		0	%		6.38	%		5.96	%
Other interest-earning assets	$	6,785		$	—		$	—		$	—		$	—		$	—		$	6,785	$	6,785
Average interest rate		0.18	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
RATE-SENSITIVE LIABILITIES
Savings & interest bearing demand deposits	$	20,621		$	—		$	6,874		$	—		$	—		$	—		$	27,495	$	27,495
Average interest rate		1.5	%		0.0	%		0.43	%		0.0	%		0.0	%		0.0	%
Time deposits	$	21,453		$	20,540		$	3,033		$	133		$	317		$	—		$	45,476	$	45,818
Average interest rate		1.90	%		2.39	%		2.86	%		2.48	%		3.03	%		0.0	%

40

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

INTEREST RATE SENSITIVITY MANAGEMENT

Some of the major areas of focus of the Corporation’s Asset Liability Committee (“ALCO”) incorporate the following overview functions: review the interest rate risk sensitivity of the Bank to measure the impact of changing interest rates on the Bank’s net interest income, review the liquidity position through various measurements, review current and projected economic conditions and the corresponding impact on the Bank, ensure that capital and adequacy of the allowance for loan losses are maintained at proper levels to sustain growth, monitor the investment portfolio, recommend policies and strategies to the Board that incorporate a better balance of our interest rate risk, liquidity, balance sheet mix and yield management, and review the current balance sheet mix and proactively determine the future product mix.

The following table presents an analysis of our interest-sensitivity gap position at December 31, 2009. All interest-earning assets and interest-bearing liabilities are shown based on the earlier of their contractual maturity or re-pricing date adjusted by forecasted prepayment and decay rates, our historical experience, and the re-pricing and prepayment characteristics of portfolios acquired through acquisition.(dollars in thousands)

				After			After
				Three			One Year
				Months			but
	Within			but			Within			After
	Three			Within			Five			Five
	Months			One Year			Years			Years			Total
Interest earning assets
Federal funds sold	$	3,114		$	—		$	—		$	—		$	3,114
Interest bearing due from banks		3671			—			—			—			3,671
Securities		1.015			1,674			679			467			3,835
Loans		19,294			17,242			38,709			4,411			79,656
Total		27,094			18,916			39,388			4,878			90,276
Interest bearing liabilities
NOW accounts		5,921			—			1,974			—			7,895
Money markets		5,861			—			1,954			—			7,815
Savings		8,839			—			2,946			—			11,785
Time deposits less than $100,000		3,784			4,881			4,575			—			13,240
Time deposits > $100,000		2,685			10,339			19,212			—			32,236
Total		27,090			15,220			30,661			—		$	72,971
Rate sensitivity gap	$	4			3,696			8,727			4,878
Cumulative rate sensitivity gap				$	3,700		$	12,427		$	17,305
Rate sensitivity gap ratio		1.00	X		1.24	X		1.28	X		—	X
Cumulative rate sensitivity gap ratio					1.09	X		1.17	X		1.24	X

41

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

INTEREST RATE SENSITIVITY MANAGEMENT-continued

The Corporation currently utilizes static gap analysis and a dynamic net interest income simulation model to measure and monitor interest rate risk. Interest rate risk is the risk to earnings or capital arising from movements in interest rates. Managing rates on earning assets and interest bearing liabilities focuses on maintaining stability in the net interest margin, an important factor in earnings growth and stability. Interest rate risk is examined from both a short term and long term perspective. Short term rate change impacts are measured through rate shock analysis of forecasted earnings. To examine the short term, we analyze earnings at risk, and for longer term risk, we look at the economic value of equity (EVE). The economic value of equity is the difference between the present value of assets and liabilities. Similar to earnings at risk, interest rate shocks are applied to the base set of rates an all present values are then re-computed.

The net interest earnings at risk analysis as of December 31, 2009 reveals that the Bank is minimally exposed to rising rates in the short term, as a 200 basis point shock would potentially decrease earnings by 1.82%. In addition, the economic value of equity analysis shows that the Bank is once again exposed to rising rates over the long term albeit minimal at 1.26% change from the base in a rising rate environment. Concerted efforts to improve the structure of the balance sheet have reduced risks associated with interest rate changes. It should be noted, however, the simulations referred to above do not incorporate any management initiated changes that may be used to further mitigate any potentially negative impact of interest rate environment changes. They do provide a conservative estimate of potential interest rate risks for the Bank and Corporation

SEC FORM 10-K

Copies of the Corporation’s annual report on Form 10-K, as filed with the Securities and Exchange Commission are available to stockholders without charge, upon written request. Please mail your request to Robert E. Farr; Chief Executive Officer, Birmingham Bloomfield Bancshares, Inc., 33583 Woodward Avenue, P. O. Box 1298, Birmingham, MI 48012-1298.

STOCK INFORMATION

The common stock of Birmingham Bloomfield Bancshares, Inc. trades on The OTC Bulletin Board under the ticker symbol “BBBI.” At December 31, 2009, there were 1,800,000 shares of Birmingham Bloomfield Bancshares, Inc. common stock issued and outstanding and approximately 824 shareholders of record.

The following table shows the high and low bid price of our common stock on the OTC Bulletin Board for each quarter of 2008 and 2009. These over-the-counter market quotations reflect inter-dealer prices, with out retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. There is not currently an active public trading market four our common stock.

	High		Low
2008
First Quarter	$	5.00	$	3.50
Second Quarter	$	6.90	$	2.25
Third Quarter	$	3.00	$	2.00
Fourth Quarter	$	4.00	$	2.00
2009
First Quarter	$	2.58	$	2.00
Second Quarter	$	2.25	$	1.75
Third Quarter	$	4.00	$	2.00
Fourth Quarter	$	2.25	$	1.55

42

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008

STOCK INFORMATION-continued

The Company has not yet paid any dividends on its common stock and does not anticipate that it will in the near future. Because the Company’s principal activity is its ownership of the Bank, its ability to declare and pay dividends is dependent upon the ability of the Bank to declare and pay dividends to it. As a result of the Bank’s startup losses, at December 31, 2009, the Bank’s retained earnings available for the payment of dividends, without approval from its regulators was $0. See Note 10 to the financial statements for a discussion of restrictions on the Bank’s ability to pay dividends.

43